Economic Trends of Global Markets - Essay Example

Economic Trends of Global Markets The principal trends likely to influence the future of global markets. In December 2000, the Global Trends (GT 2015), a paper published by the National Intelligence Council (NIC) described a "networked global economy" primarily driven by rapid and largely unrestricted flows of information, ideas, cultural values, capital, goods and services, and people. It also provided an optimistic projection of an economic growth fueled "by political pressures for higher living standards, improved economic policies, rising foreign trade and investment, the diffusion of information technologies, and an increasingly dynamic private sector". However, GT 2015 cautioned that a resilient global economy will be contingent on avoiding several potential brakes to growth of future global markets. These are: First, the U.S. economy's downturn due to its large trade deficit coupled with low domestic savings making it vulnerable to a loss of international confidence in its growth prospects which in turn could lead to a sharp downturn and will be detrimental in the long run. It is also recognized that these possible fall will be accompanied by economic and policy consequences in the rest of the world as an effect of more global integration among nations. Second is about Europe and Japan's aging populations which necessitates the employment of more than 110 million new workers by 2015 to maintain current dependency ratios between working population and retirees. In addition, the conflicts over social services or immigration policies in major European states could dampen and hamper economic growth. Third, China and/or India's failure to sustain high growth due to unstable reforms in restructuring state-owned enterprises, transforming the banking system, and cutting the government's employment rolls in half. Fourth, there is a possibility of failure of emerging market countries to reform their financial institutions which can trigger a series of future economic crises. As with historical downturns, these can be detrimental to these nations as it will hamper their growth potentials by drying up capital flows crucial for economic growth. Lastly, major disruption in global energy supplies that "could be driven by conflict among key energy-producing states, sustained internal instability in two or more major energy-producing states, or major terrorist actions" (15). Why is the United States currently experiencing a major trade deficit In March 2006, Robert Scott reported that the United States' major trade deficit was caused by "rapid growth in the deficit on goods and services trade and large increase in unilateral transfers, which were temporarily reduced by payments from foreign insurers for losses caused by hurricanes Katrina and Rita in the third quarter." Two-thirds of the increase in U.S. deficit was largely attributed to the rapidly rising oil prices and imports according to Scott. In addition, he also cited the rapid growth of interest payments to foreign holders of U.S. Treasury securities. Foreign holdings of these securities, whose interest rates are expected to rise as well, have increased by $ 108 billion in the last quarter of 2005 alone. Scott estimated that foreign borrowings made up for more than 80% of the federal debt increase. With the Asian governments' bullish promotion of its export-led growth at the backdrop, Scott pointed that the 11% decline in the U.S. dollar's value since the second quarter of 2002 was insufficient to slow the trade deficit's growth. He added that "the dollar must fall by at least 30% to 40%" for the deficit to reach a sustainable level of less than 3% of the U.S. GDP. This would reduce export prices and achieve the needed increase in exports relative to imports. This scenario will likewise push up the prices of imports in the U.S. resulting to import reduction and a shift in demand favorable to U.S. products. Why are some observers optimistic about the long-term trade position of the United States According to a Washington Post article early 2005, the U.S. trade deficit narrowed in December [2004] but was still the second-highest monthly figure ever. This narrowing of the deficit sent a glimmer of optimism especially to the Federal Reserve Board Chairman Alan Greenspan who predicted that the deficit may soon start leveling off and possibly even shrink due to the fall of the dollar against other currencies making U.S. goods more competitive abroad. Paul Blustein, author of the article, also explained the drop in the value of petroleum imports due to an 11% drop in prices, largely accounted for the narrowing deficit. In addition to that, the trade report issued by the Commerce Department stated a "$3.1 billion increase in exports, to $100.2 billion, with the boost spread widely among capital goods, industrial supplies and consumer products" (qtd. in Blustein). Optimistic analysts believe that the falling dollar would further improve shipments of U.S. goods overseas. Blustein capitulated that the decline of the dollar since 2002 has been the sharpest against the currencies of Europe, Canada, Britain and Australia. No less than the vice president for international affairs at the National Association of Manufacturers was hopeful that this will begin to improve trade balance in 2005 since there is always a lag of a couple of years between the time a currency shifts and the time that is reflected in trade values. Lastly, some members of the U.S. Congress have already introduced a legislation calling for across-the-board tariffs on Chinese goods after complaints from the NAM and labor unions of an artificially low level valuation of the yuan. Allegedly, the currency policy of China is giving its products an unfair advantage in the world markets. Scott has stressed that the largest increase in U.S. trade deficit was with China at 34%, from whom the U.S. does not import oil. Works Cited Blustein, Paul. "2004 Trade Deficit Hits All-Time High." washingtonpost.com. 10 Feb. 2005. Washington Post Company. 23 Mar. 2006 National Intelligence Council. "Global Trends 2015: A Dialogue About the Future with Nongovernment Experts". December 2000-02: 15-98. Central Intelligence Agency. 23 Mar. 2006 Scott, Robert. "U.S. Current Account Deficit Breaks Record at 7% of GDP." Current Account Picture. 14 Mar. 2006. Economic Policy Institute. 23 Mar. 2006 Read More